IOLTA. Managing Clients Funds. Avoiding Ethical Problems. and. October Jayne B. Tyrrell, Esq. and Stephen M. Casey

Transcription

1 IOLTA MASSACHUSETTS INTEREST ON LAWYERS TRUST ACCOUNTS Managing Clients Funds and Avoiding Ethical Problems October 2011 Jayne B. Tyrrell, Esq. and Stephen M. Casey 0

2 1 Table of Contents I. Understanding Client Fund Accounts 2 A. Introduction 2 B. A Standard of Strict Accountability 2 C. What Funds are "Trust Funds"? 3 1. Conveyancing accounts Advanced fees/retainers 6 D. Depositing Funds into an IOLTA Account, or a Separate Interest Bearing Account 7 E. Deposits to Trust Fund Accounts 8 F. Disbursement of Client Funds 9 G. Operational requirements Accounting Records 11 H. Dishonored Check Notification Rule 14 I. Refund Policy 16 J. Internet Scams Targeting Lawyers 16 II. APPENDICES 17 A. Mass. R. Prof. C., Rule B. Mass. R. Prof. C., Rule 1.5, Fees 25 C. Sample Client Accounting Forms 29 D. End Notes 32

3 2 I. Understanding Client Fund Accounts 1 A. Introduction Safekeeping Property Rule 1.15 of the Massachusetts Rules of Professional Conduct (Mass. R. Prof. C.) establishes the standards and guidelines by which lawyers are expected to manage client and third party funds. In addition, the record keeping rules provide minimum standards for trust fund account record keeping. The rules require that withdrawals not be made by ATM or checks made out to cash; 2 describes the types of account documentation needed 3 and mandates that lawyers reconcile accounts at least every sixty days. 4 As of March 15, 2011, lawyers need to be more specific than previously about the fees and expenses they charge clients and how those charges are calculated. The amended rule requires lawyers to secure clients consent about all fee related issues before or at the outset of the attorney-client relationship. This publication contains the revised provisions of the attorney-client relationship and suggests guidelines for lawyers to follow in order to meet their obligations under Mass. R. Prof. C., Rule The Massachusetts Rules of Professional Conduct including Rule 1.15 are based substantially on the American Bar Association Model Rules of Professional Conduct (Model Rules). They were adopted in 1997 by the Supreme Judicial Court Justices effective January 1, 1998, replacing the Disciplinary Rules (DRs) of the Code of Professional Responsibility (CPR). Rule 1.15(e) was preceded by Disciplinary Rule (C) as amended January 1, 1990 which established a comprehensive Interest on Lawyers Trust Account (hereinafter referred to as IOLTA) program in Massachusetts. Through interest generated on certain trust funds accounts, the IOLTA program funds legal services to the disadvantaged and projects which improve the administration of justice. B. A Standard of Strict Accountability Under Mass. R. Prof. C., Rule 1.15, a lawyer should hold the property of others with the care required of a professional fiduciary. This means that a lawyer handling client funds should act for the benefit of the client in the context of a relationship characterized by great confidence and trust on the part of the client and good faith and candor on the part of the lawyer. The fiduciary nature of the relationship and the need for public confidence in the legal profession places several burdens on a lawyer. First, in handling client funds, the lawyer must not only act properly but must also avoid even the appearance of acting improperly. Therefore, the lawyer is obligated to follow certain protective procedures to

4 minimize the possibility of wrongdoing. For example, securities should be kept in a safe deposit box, except when some other form of safekeeping is warranted by special circumstances. All property which is the property of clients or of third parties should be kept separate from the lawyer s business and personal property; monies should be placed in one or more trust fund accounts. Separate trust accounts are warranted when administering money from estates or acting in similar fiduciary capacities. Second, each lawyer is personally responsible for the proper deposit and maintenance of clients and third party funds. While necessity often requires delegation of administrative duties within a law practice, the lawyer still must establish, be familiar with and ensure the proper operation of the adequate procedures for the handling of client funds. Specifically, lawyers who delegate any part of their trust fund account responsibilities to their staff must provide effective guidelines for the proper handling and maintenance of these accounts and supervise staff activities. The record keeping provisions must be integrated into the law practice. In summary, the basic premise that underlies the rule is that a lawyer who, incident to professional practice, holds money, any part of which belongs to another, whether a client or a third party, must keep that money in a separate account maintained in a financial institution. The funds must be deposited either in a pooled IOLTA account, which pays interest to the Massachusetts IOLTA Committee, or in an interest bearing account for the client s benefit. This money may not be commingled with money belonging to the law office or to the lawyer personally except to pay bank service charges. 3 C. What Funds are "Trust Funds"? Mass. R. Prof. C., Rules 1.15 (a) and (e) define trust funds as funds which are held in trust for clients or others, or held in any other fiduciary capacity in connection with a representation, except advances for costs and expenses. (For a discussion of costs and expenses see page 7.) The rule requires that trust funds be deposited in one or more identifiable bank accounts in Massachusetts (assuming the law office is located here) in which no other funds are deposited except those necessary to pay bank service charges or to meet minimum balance requirements. Among the monies which are to be treated as trust funds are: 1. All advances for fees and most retainers 5 received from clients, until they are actually earned by the lawyer (See section on retainers/advanced fees, pages 6-7); 2. Funds which belong in part to the client and in part to the lawyer; 3. Funds of the client that are being held for disbursement at a later time; 4. Funds of third parties to be distributed at a later time;

5 4 5. Personal injury awards including PIP funds, alimony payments, real estate conveyancing monies and litigation settlements. All trust funds must be deposited in one of two types of interest-bearing accounts: a pooled IOLTA account, or an individual client account. A pooled IOLTA account contains all client funds which, in the judgment of the lawyer, are nominal in amount or are to be held for a short period of time. An individual client account, separately established for each client, is used for all other client funds. Interest earned on pooled IOLTA accounts is transferred by the bank to the IOLTA Committee. Interest earned on individual client account accrues to the benefit of the individual client and is payable as directed by the client. In contrast to trust fund accounts, a lawyer s operating account is used to hold the lawyer s earned fees and to pay the lawyer s operating expenses. A lawyer must not deposit client funds to an operating account, or a personal checking or savings account. As of January 1, 2004, a lawyer is required to maintain a separate business and/or personal account for the lawyer's own funds for clearer record keeping Conveyancing accounts. 7 The conveyancing exception to the IOLTA rule. There is one narrow exception to the requirement that client funds be deposited to either an IOLTA or individual interest-bearing client account. That exception is for conveyancing accounts, but only in certain limited circumstances. A conveyancing account is exempt from the IOLTA requirements under Mass. R. Prof. C., Rule 1.15(e)(5) if it is an account in a lending bank in the name of a lawyer representing the lending bank and used exclusively for depositing and disbursing funds in connection with that particular bank s loan transactions,... The rationale behind this exemption is that the interest earned will be retained by the banks making the loans. Note that the exception applies only to banks, not mortgage companies, although a mortgage company which is simply the mortgage arm of a bank would appear to qualify for the exemption. As an example, a conveyancing account at Bank A does not have to be an IOLTA account if all the monies deposited to and disbursed from the account involve closings for Bank A. However, a closing for Bank B cannot be done from Bank A account unless the account at Bank A is an IOLTA account. Thus, if a lawyer does closings for several lending institutions from the same client account, the account must be an IOLTA account. It is only when closings are being done for the lending bank at which the account is maintained, and only for that lending bank, that the conveyancing exception applies. Closings for mortgage companies must be done through an IOLTA account. As noted above, the only exception might be for closings being done for a mortgage company which is the mortgage arm of a bank. In that case, if the account is maintained

6 5 at that same bank and only closings for that bank s mortgage company are transacted through the account, an exempt conveyancing account could be established. In other words, an exempt account could be established at Bank C for closings for Bank C Mortgage Corporation only. Even if the conveyancing exception is applicable, the rule provides that the lawyer is permitted to establish the account as an IOLTA account. Also, if the conveyancing account is not established as an IOLTA account, it should be a noninterest-bearing client account and not a NOW account or other account earning interest. Finally, the account in all circumstances must be properly denominated as an IOLTA account, conveyancing account, trust fund account, or similar designation. (See Rule 1.15(e) (5). Note, conveyancers sometimes find themselves holding client funds for some period of time after the closing while title problems are resolved. The conveyancing exception is not applicable to this circumstance. Unless the parties direct otherwise, such funds should be moved to an individual interest-bearing trust account. To the extent that the funds are retained in either an exempt conveyancing account or an IOLTA account in the expectation that the title will be quickly cleared, the lawyer must monitor the situation and transfer the funds to an individual interest-bearing escrow account when it becomes apparent that resolution of the problem will be delayed and interest can be earned for the client. To the Editor: CONVEYANCING ACCOUNT CONFUSING BY PAUL L. LEVINE, ESQ. LOWELL As most conveyancing attorneys know, it is mandatory as of Jan. 1 that lawyers establish interestbearing IOLTA accounts for short-term client funds. However, there seems to be some confusion about the conveyancing account exemption, and what it involves. After talking to several lawyers and hearing several versions of the rules, I decided to call the IOLTA Committee. I found that only a limited type of conveyancing account is exempt; the exemption does not apply to all accounts used for conveyancing. The only accounts exempt from IOLTA are those conveyancing accounts in a lending bank used exclusively for depositing and disbursing funds in connection with that bank s loan transactions. In simple terms, an account in Bank A does not have to be an IOLTA account if all the monies put through the account involve closings with Bank A. However, a closing with Bank B cannot be put through an account with Bank A unless it is an IOLTA account. It would seem that all conveyancers will need at least one IOLTA conveyancing account to handle any miscellaneous lenders with which they have no escrow account. But any current conveyancing account which is not interest bearing need not be changed so long as it is limited to closings with only that particular bank. I hope this will help conveyancers as Jan. 1 approaches. MLW, December, 1989

7 6 2. Advanced fees/retainers 8 Questions about attorneys' fees generate more complaints to the Office of Bar Counsel than any other issue. The handling of "retainers" or "advanced fees" and whether they should be treated as clients funds seems to engender much confusion. The words "advanced fees" and "retainers" are used interchangeably throughout the profession. An advanced fee or retainer is the payment of funds in advance to a lawyer for a particular service or for a particular case. Most retainers or advanced fees are payments to a lawyer to be earned as services are provided. (See discussion on narrow exception below.) In such cases, the funds belong to the client until they are earned through the services provided by the lawyers. C. Wolfram, Legal Ethics (1986). Such advanced fees/retainers are always subject to refund if they are not earned. Deposit of Retainers. Retainers or advanced fees as defined above, paid in advance for the handling of a particular case, are client funds and must be deposited to an interestbearing account until earned by the lawyer. Since the lawyer may not commingle personal funds with client funds [Mass. R. Prof. C., Rules 1.15 (b)(2) (ii)], the lawyer must promptly withdraw the fee from the client funds account as it is earned. Attorneys Fees. Under the new provisions of Mass. R. Prof. C., Rule 1.5, lawyers are prohibited from charging clients an unreasonable amount for expenses as well as illegal or clearly excessive fees. 9 The revised rule contains two form fee agreements, Form A requires no explanation to the client while Form B contains options and written consent from clients for the options selected. Accounting to Client for Fees Earned. The rule requires lawyers, on or before the date of withdrawing funds to pay fees earned, to mail or deliver to the client (1) a written itemized bill accounting for services rendered, (2) written notice of the amount and date of withdrawal and (3) a statement of the balance of the client s fund in the trust account after the withdrawal. 10 Mass. R. Prof. C., Rule 1.15 (f) requires lawyers to maintain complete records regarding the receipt, maintenance and disposition of client funds. Retainers and advanced fees fall within this category. In addition, the lawyer must render a full accounting to the client or third party, upon request, for the disposition of all funds. Non-Refundable, Flat Fees. There are no fees that are not refundable. Bar Counsel will review whether a portion of the fee should be returned regardless of whether the lawyer views the fee as non-refundable or flat. The fee may not interfere with the client s right to discharge the lawyer at any time. Mass. R. Prof. C., Rule 1.16 (d). In Smith v. Binder, 20 Mass. App. Ct. 21 (1985), the attorneys were paid a retainer of $8,500 for representation in a criminal case. Plaintiff-clients sued the attorneys for an accounting and refund three weeks later, after they had discharged the attorneys. Defendant-attorneys claimed the fee was non-refundable and asked the court to take judicial notice that it is an accepted custom and practice among attorneys of the

8 criminal bar that retainers taken in connection with representation of criminal defendants are non-refundable. The trial judge granted a Rule 41 motion and found that plaintiffs knew the fee was non-refundable. Appeals Court reversed, finding no evidence to support that finding. In a footnote, the Appeals Court noted authority holding that requiring a client to agree to a non-refundable fee was unethical. In its opinion, the Appeals Court observed that the right to change lawyers at any time was [e]ssential to the lawyer client relationship and that, if the lawyer were permitted to keep the unearned portion of the fee, the right to change lawyers would be of little value. There is one narrow exception to the "retainer" discussion. There is one type of retainer, known as a classic retainer, in which the client binds the attorney to employment to the exclusion of adverse parties. The retainer is seen as payment for the establishment of this exclusive relationship - not for specific, pending services required. The advantage to the client is in securing the services of the lawyer of choice over a period of time, whereas the lawyer foregoes the possibility of employment by others whose interest might be adverse to the client. The payment is in return for the attorney s agreement to be bound to the client and is therefore earned when paid. Blair v. Columbian Fireproofing Co., 191 Mass. 333 (1906). 7 D. Depositing Funds into an IOLTA Account or a Separate Interest Bearing Account Mass. R. Prof. C., Rule 1.15 provides that client or third party funds must be placed in interest bearing accounts, the interest must be credited to the client s account, or deposited in an IOLTA account for the benefit of legal services to the poor and the improvement of the administration of justice. Under Mass. R. Prof. C., Rule 1.15 (e)(5), it is the lawyer s responsibility to exercise good faith judgment in determining initially whether funds of a client are of such nominal amount or are expected to be held by the lawyer for such a short period of time that the funds should be placed in an IOLTA account. If the lawyer determines the amounts are not nominal or short term, the lawyer must establish a separate client fund account for the benefit of the individual client. In this case, the lawyer will need to obtain the client s social security number or employer identification number to give to the bank so that the tax on any earned interest can be assigned to the client. Although funds such as advances for costs and expenses are not required to be deposited in client fund accounts, the lawyer has the same accounting, record keeping, and payment responsibilities for these types of funds held in a general office account as for funds held in the client fund accounts. Advances for costs and expenses may be deposited in an IOLTA account. The obvious question is how do you know when to use the pooled account where the interest is paid to the IOLTA Committee and when to use an account where the interest is paid to the client?

9 8 The Guideline to the Rule explains how to determine which account to use. The sole question that the lawyer must answer is whether the client funds could be utilized to provide a positive net return to the client. In deciding whether there will be a positive net return, the lawyer must consider (1) the amount of interest the funds would earn during the period they are to be deposited, (2) the cost of establishing and administering the account including a reasonable cost for the lawyer s services and the cost of preparing the necessary tax reports, and (3) the capability and cost of the financial institution to calculate and pay the interest to the individual client. There is no bright line by which a lawyer can know where to deposit the funds. Instituting procedures to make sure that this issue is considered and resolved when dealing with client funds will help you comply with the Massachusetts Rules of Professional Conduct, and avoid potential financial liability. E. Deposits to Trust Fund Accounts 1) Which Funds? All funds which qualify as client funds as defined on page 3, must be deposited into a trust fund account. The law firm should have a clearly expressed written policy, for all lawyers and staff, as to what funds are deposited into a trust fund account. 2) When? Deposit of client or third party funds should be made daily. 3) Where? Under Mass. R. Prof. C., Rule 1.15 (g) funds must be deposited in a bank, savings and loan association, or credit union authorized by Federal or State law to do business in Massachusetts and insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. The financial institution holding the account must have agreed to abide by the Board of Bar Overseers Dishonored Check Rule. Client or third party funds should not be deposited, hidden or concealed in the law office. All securities and properties of a client should be identified and labeled and promptly placed in a safe deposit box or other place of safekeeping as soon as practical. The same attentive care and precautionary procedures should be adopted for the receipt, holding and disbursement of these properties as is given to the safe maintenance of trust accounts for client funds. 4) How? Sound accounting advice is never to transmit money without written communication. A voucher or other documentation for receipt and instruction should be prepared by the attorney, instructing the person performing the bookkeeping function to deposit the funds into the client fund account on behalf of the client named in the voucher or receipt. Written communication avoids later confusion about the source and purpose of client fund deposits and provides a needed audit trail.

10 5) Notify Client. Mass. R. Prof. C., Rule 1.15 (c) 11 requires that clients be notified promptly of the receipt of their funds, securities, or other properties. The rule is particularly needed regarding funds received from third parties. Compliance avoids misunderstanding, mistakes and mistrust. 9 F. Disbursement of Client Funds 1) Timing. Before disbursement of trust funds, the client s or third party check should have cleared through the banking process. If this precaution is not taken, and the initially receipted check is returned for insufficient funds or a stop payment order is issued, the trust funds of other clients may be disbursed wrongfully. Since even cashier checks and certified checks are occasionally dishonored, the best policy is to be assured that the initial receipts have cleared the banking process. 2) Amounts. Trust fund disbursements from the client s ledger must not exceed the funds received from or on behalf of that client. Otherwise, a wrongful taking of other client trust funds occurs, resulting in both civil and disciplinary liability. As a precautionary measure, both the person requesting the disbursement and the individual signing the check should have a copy of the particular client s subsidiary ledger before requesting or authorizing the disbursement of trust funds. 3) Identify the Transaction. Again, built into the process, by either voucher request or other documentation, there should be a clear description of each disbursement, including the identity of the file to be charged and the reason for the transaction. 4) Signature. Who will sign trust checks is probably best left for each firm to decide. Generally, the person who prepares the checks should not have signatory authority. Regardless, no individual should sign a check unless presented with written documentation indicating that the disbursement is proper, principally that the original receipted funds have cleared the banking process, and that the client s subsidiary ledger account contains adequate funds. Disbursement procedures should be clearly stated in established rules for the firm. Requiring two signatures for large check amounts is also recommended. 5) Internal Controls. Proper disbursement of trust funds is greatly enhanced by a strong system of internal controls. Job functions should be structured to allow for an adequate segregation of all duties relating to the handling of trust funds. For example, the reconciliation process should be performed by personnel who are not involved in the bookkeeping process, ideally by the lawyer or the firm administrator. Also, internal controls are weakened when the same person who prepares the check signs the check. Other important control procedures include: proper authorization, recording, and documentation of all trust fund transactions, limited access to trust fund accounts and client property, periodic independent verification of client accounting records, and sound personnel practices. Finally, no system of internal controls can function effectively without the active involvement of the lawyer(s) responsible for the trust funds.

11 10 6) Interest of Third Parties. The trust and fiduciary obligations imposed by Mass. R. Prof. C., Rule 1.15 extend beyond the client to third parties who have an interest in the disposition of the funds. The rule applies to all clients fund accounts, including IOLTA, trust and escrow accounts. In addition, the rule pertains to any funds being held by a lawyer even if the lawyer is holding those funds in another capacity, such as a trustee or conservator for a family member or other person. Please note, if the property is being held on a pro bono basis, as a custodian for a minor family member, the property is not subject to the Operational Requirements for Trust Accounts set out in Rule 1.15 (e) or (f). 12 G. Operational requirements The ability to precisely document the complete history and disposition of all client funds is the central requirement when accounting for trust accounts. Rule 1.15 does not mandate any particular client trust accounting system, but it spells out the required components. The system described below will provide the basics to account for clients= funds. Rule 1.15 requires two basic kinds of records: (1) records created by the bank that show what went into and out of the lawyer s client trust bank accounts; and (2) records created by the lawyer to explain the transactions reflected in the bank documents. Length Of Time Records Need To Be Retained Rule 1.15 (f) requires keeping trust accounting records for six years after the funds are paid out and after termination of the representation of the client. The Use Of Computerized Records Although most law firms and lawyers now routinely rely on computerized systems for trust fund accounts, a lawyer using a computerized accounting system must still maintain the check register, client ledgers, bank charges ledger and reconciliation reports in a form that can be reproduced and printed in hard copy. Additionally, because computer data can be lost through electrical storms, fire, power or equipment failure, software malfunction and human error, electronic records must be regularly backed up by an appropriate storage device. (Rule 1.15(f) (1) (G)) The Types Of Bank-Created Documents That Need To Be Retained Rule 1.15 (f) requires retention by the lawyer of all documents recording transactions that the bank returns to the lawyer. This may include such documents as client trust bank account statements, cancelled checks and records of electronic transactions. Banks no longer automatically provide cancelled checks to customers, but lawyers will want to make sure their bank provides either the originals or photo images of cancelled checks (including both sides of the checks).

12 11 Suggestion For Filing Bank-Created Documents A basic system would involve keeping a separate binder (or folder) for each client trust bank account. Each folder should have one section for bank statements, one section for originals or photo images of cancelled checks and records of electronic and other transactions, one section for copies of deposit slips and one section for checkbook stubs or records, computer-generated equivalents or copies of checks created by onewrite methods as the checks are written. Deposit slips and checkbook stubs or records provide a complete audit trail. In this system, each document is filed in date order in the appropriate section of the binder for the account they refer to. Label each binder with the name of the client trust bank account and the period it covers. Note that binders for a pooled account will have cancelled checks pertaining to all of the clients whose funds are in the pooled account. Types Of Client Accounting Records Required To Be Retained Rule 1.15 (f) (1) (A) requires lawyers to record the name and address of the bank or other depository, the account number, the account title, the opening and closing dates, and the type of account (whether it is an IOLTA account or a separate client fund account for the client). For each account, there are three types of accounting records that are required to be maintained by the lawyer. They are; the check register, client ledgers and a ledger for bank fees and charges. 1. Accounting Records The Client Ledger Rule 1.15 (f) (1) (C) requires keeping individual client records for each separate matter in which the lawyer holds funds for the client. This client ledger must give the name of the client, detail all money received and paid out on behalf of the client or third party, and show the client=s balance following every receipt or payment. See Exhibit A. Maintaining a client ledger is like keeping a separate checkbook for each client, regardless of whether or not the client s money is being held in an IOLTA account or a separate account. Every receipt and payment of money for a client must be recorded in that client=s client ledger. If depositing more than one check but using a single deposit slip, record each check as a separate deposit in the client ledger. For every receipt, list the date, amount and source of the money. For every payment, list the date, the amount, the check number, the payee and the purpose of the payment. After you record each receipt, add the amount to the client=s old balance and write the new total. After recording each payment, subtract the amount from the client s old balance and write in the new total. The following is a description of opening and maintaining a client ledger for a new client, Mark Twain. At the first meeting on January 5, 2011, MT gives a check for $1,500 as an advance fee. If the decision is made to place the funds in an IOLTA account, the lawyer will deposit MT=s money into the account and create a new client ledger for him. The new client ledger could look like the one in Exhibit A or see below.

13 12 Date Client Ledger Client MT Case #: Chk No. Payee or Source of Deposit Description of Transaction Amount Paid Amount Received Running Balance 1/5/11 Mark Twain Advance Fee $1, $1, Date On February 5, the lawyer sends the client a description of services provided to him, including an accounting of the $500 fee for which the lawyer is writing a check to his or her firm. Client Ledger Client MT Case #: Chk No. Payee or Source of Deposit Description of Transaction Amount Paid Amount Received Running Balance 1/5/11 Mark Twain Advance Fee $1, $1, /5/ Law Firm of X Professional Fee Invoice No. 1 $ $1, Date 10/3/10 Bank Charges Ledger Rule 1.15 (f)(1)(d) requires lawyers to record every bank charge against the client trust fund account in the check register and permits the lawyer to keep his or her money in the account to pay these charges and fees. Lawyers should keep a bank fees and charges ledger the same way that client ledgers are kept, as part of an check register system. Record every deposit of lawyer funds, every charge the bank makes against the account, and the running balance in both the client ledger and the check register. Bank Charges Ledger Client: Bank Charges Case #: N/A Chk No Payee or Source of Deposit Description of Transaction Balance Forward Amount Paid Amount Received Running Balance $ /30/10 Self $ $ /30/10 Check Printing $10.00 $140.00

14 13 Date Check Register Rule 1.15 (f) (1) (B) requires a check register in chronological order with the date and amount of all deposits; the date, check or transaction number, amount and payee of all disbursements, whether by check, electronic transfer, or other means; the date and amount of every credit or debit and the identity of the client matter and the current balance in the account. Maintaining a check register is very similar to keeping a client ledger. For your pooled accounts, keeping the check register is the only way to know how much money is in the account at any given time and is essential for performing required reconciliations. If maintained and used properly, this journal will help prevent bounced checks (unless there is a bank error). Sample Check register Law Office of Lawyer Doe Client Funds Account: ABC Bank Chk No. Payee or Source of Deposit Description of Transaction Client ID Amount Paid Amount Received Running Balance 12/31/09 Balance Forward $14, /4/ Law Firm of X Prof. Fee AZ $1, $13, Invoice No. 7 1/5/10 MT Retainer MT $1, $14, /7/10 Insurance Company Settlement, Bodily Injury 1/7/ George Hanson Final Disbursement of Settlement Proceeds EF#7 $3, $18, GH $6, $11, Reconciliation Rule 1.15 (f)(1)(e) requires lawyers to keep records of reconciliation (balancing)of the client ledgers, bank charges ledger, check register and bank statements. Reconciliation means checking the basic records the bank statements, the client ledgers, the bank charges ledger and the check register against each other so any mistakes can be

15 corrected. Rule 1.15 requires that client trust account records be reconciled every sixty days and that a written record that shows the records were reconciled be kept. It is recommended, however, that you reconcile these accounts on a monthly basis. 14 There are four main steps in reconciliation: 1. Comparing the check register with the client ledgers and bank charges ledger to make sure the sum of the running balances in all client ledgers plus the bank charges ledger is equal to the running balance in the check register. 2. Entering previously unrecorded bank charges and interest shown on the bank statement into the check register and client ledgers or bank charges ledger as appropriate. 3. Reconciling each check register with the corresponding bank statement to make sure that the lawyers records agree with the bank statement. This requires adjusting the bank statement s balance by adding deposits made after the bank statement s closing date and subtracting checks not received by the bank until after the bank statement s closing date. 4. Entering corrections (explanations of errors found, not just a note that the numbers did not balance) in the client ledgers and check register so that the running balances are the same as the bank statement balance. Exhibit C is an example of a reconciliation worksheet that can be used to complete your periodic reconciliations. Computer Software The foregoing functions are now routinely handled in many law offices by an automated accounting system. Many systems have the capability of generating reports as to each of the factors set forth above. Thus, for example, a few keystrokes, or mouse clicks, can generate a cash receipts journal for a given period of time or allow a lawyer to create a client ledger. Some systems, but not all, have trust accounting capabilities. Regardless of whether a manual or automated system is used, however, the system is only good as the information provided to it. H. Dishonored Check Notification Rule 13 As of October 1, 1995, all financial institutions which want to qualify to handle lawyer client fund accounts must agree to report all client fund account checks which are dishonored because of insufficient funds to the Board of Bar Overseers. A copy of the Dishonored Check Rule is included in the materials. (See page 23.) In addition all

16 lawyers who are notified of a dishonored check are required to provide the BBO with a written explanation of the reasons for the dishonored check. 15 The Board of Bar Overseers maintains a central registry of all banking institutions whose agreements to abide by the dishonored check rule have been approved. The list of approved institutions is also posted on the Board s website, It is important to note that it is the lawyer s responsibility to ensure that the banking institutions he or she uses are those that have agreed to the rule. The bank in which the client fund account is maintained must provide dishonored check reports to the BBO. Such a notification must be generated whenever a check that would otherwise be properly payable is dishonored because of insufficient funds. Once the BBO receives a dishonored check notice from a bank, a report is made and a file opened on the lawyer. Bar Counsel then sends a letter to each lawyer, requesting an explanation as to why the check was dishonored. If the check was dishonored because of a bank error, then the file may be expunged. If the BBO is satisfied with the lawyer s response as to why the check was dishonored, the file is closed. If the BBO is not satisfied with an lawyer s explanation of why a check was dishonored, further investigation will be conducted into the lawyer s accounting methods and business practices. The experience with this rule indicates that there are several causes of dishonored checks that can be eliminated. The following steps will help you avoid this problem: (1) Make sure that you have deposited the client funds and they have cleared the banking process before you disburse funds. (2) Keep accurate deposit records in case there is ever a question of depositing to the correct account. Banks occasionally credit the wrong accounts of law firms, or otherwise inaccurately record transactions. (3) Determine the amount and timing of service fees, especially the cost of check printing. It is permissible to maintain a minimal amount of lawyer funds in the account to cover service charges, check charges and minimum balances. Treat these funds as a separate client and keep track of them on their own ledger. Deduct these charges from the account balance. (4) Reconcile your account regularly so that mistakes do not multiply into a dishonored check. (5) Find out how your bank handles the closing of accounts, and insure that all outstanding checks have cleared before closing a client fund account.

17 16 I. Refund Policy In the event an lawyer notifies the IOLTA Committee in writing that funds of a client or a third person were erroneously deposited into, or kept in an IOLTA account, the Executive Director will review the request, and a refund of any interest paid to the Committee as a result of the error will be made. The lawyer must provide due proof and substantiate with acceptable documentation: the dates the funds were deposited, the amount of money on which the interest was paid, the length of time the funds were in the IOLTA account as well as the circumstances which led to the error. J. Internet Scams Targeting Lawyers Recently, several lawyers in Massachusetts have fallen victim to tricky scams. Losses have run from $100 to $375,000. The scams often run through the IOLTA accounts. Often, a fraudulent client from another country contacts a law firm via indicating they are involved with some legal issue with a domestic company. That company will either settle a claim within the next few days or the parties will go to court. The law firm is asked to act as a settlement agent, or possibly represent the foreign client going forward. Shortly afterwards, a counterfeit check comes to the law firm with the other party listed as remitter. The law firm takes their cut from the check and is asked to wire the rest. These checks may pass initial deposit fraud review. There are ways to avoid becoming a victim. Know who you are doing business with. If you deposit a large check have a clear idea where that money is coming from. Don t be too quick to take on a new client unknown to you. As hard as it may be in this economy, prudence and due diligence still pay high rewards. Ask questions. Be up front about needing confirmation that the contact is who and what they claim to be. Be wary of the need for great speed in processing the money. If you suspect that an is a scam and have not yet established a client relationship with the sender, you can generally report the contact to the Internet Crime Complaint Center (ICCC). In and of itself this information is not confidential except in rare cases. It gets more complicated if you have begun the relationship and then suspect that you are being scammed. If you think a client is scamming you, you would normally confront the client, evaluate the response and continue the relationship or withdraw from it. If you suffered losses from being scammed, after withdrawal you could pursue civil or criminal remedies, respecting the duty to preserve confidentiality as appropriate, or simply write the loss off. According to the cyber experts, internet scams are not going to stop anytime soon, especially in a bad economy. Not only do the scammers need the money more, they know that their targets are more vulnerable to earn money now solicitations.

18 So what should lawyers do if they think they might be the target of a scam? Make a report immediately to the Internet Crime Complaint Center on the ic3.org Web Site. If money has been lost, notify local police or the FBI, as well as the ICCC. 17 II. APPENDICES A. Mass. R. Prof. C., Rule 1.15 Safekeeping Property (a) Definitions: (1) Trust property means property of clients or third persons that is in a lawyer's possession in connection with a representation and includes property held in any fiduciary capacity in connection with a representation, whether as trustee, agent, escrow agent, guardian, executor, or otherwise. Trust property does not include documents or other property received by a lawyer as investigatory material or potential evidence. Trust property in the form of funds is referred to as trust funds. (2) Trust account means an account in a financial institution in which trust funds are deposited. Trust accounts must conform to the requirements of this rule. (b) Segregation of Trust Property. A lawyer shall hold trust property separate from the lawyer's own property. (1) Trust funds shall be held in a trust account, except that advances for costs and expenses may be held in a business account. (2) No funds belonging to the lawyer shall be deposited or retained in a trust account except that: (i) Funds reasonably sufficient to pay bank charges may be deposited therein, and (ii) Trust funds belonging in part to a client or third person and in part currently or potentially to the lawyer shall be deposited in a trust account, but the portion belonging to the lawyer must be withdrawn at the earliest reasonable time after the lawyer's interest in that portion becomes fixed. A lawyer who knows that the right of the lawyer or law firm to receive such portion is disputed shall not withdraw the funds until the dispute is resolved. If the right of the lawyer or law firm to receive such portion is disputed within a reasonable time after notice is given that the funds have been withdrawn, the disputed portion must be restored to a trust account until the dispute is resolved.

19 18 (3) Trust property other than funds shall be identified as such and appropriately safeguarded. (c) Prompt Notice and Delivery of Trust Property to Client or Third Person. Upon receiving trust funds or other trust property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or as otherwise permitted by law or by agreement with the client or third person on whose behalf a lawyer holds trust property, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third persons entitled to receive. (d) Accounting. (1) Upon final distribution of any trust property or upon request by the client or third person on whose behalf a lawyer holds trust property, the lawyer shall promptly render a full written accounting regarding such property. (2) On or before the date on which a withdrawal from a trust account is made for the purpose of paying fees due to a lawyer, the lawyer shall deliver to the client in writing (i) an itemized bill or other accounting showing the services rendered, (ii) written notice of amount and date of the withdrawal, and (iii) a statement of the balance of the client s funds in the trust account after the withdrawal. (e) Operational Requirements for Trust Accounts. (1) All trust accounts shall be maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person on whose behalf the trust property is held, except that all funds required by this rule to be deposited in an IOLTA account shall be maintained in this Commonwealth. (2) Each trust account title shall include the words trust account, escrow account, client funds account, conveyancing account, IOLTA account, or words of similar import indicating the fiduciary nature of the account. Lawyers maintaining trust accounts shall take all steps necessary to inform the depository institution of the purpose and identity of such accounts. (3) No withdrawal from a trust account shall be made by a check which is not prenumbered. No withdrawal shall be made in cash or by automatic teller machine or any similar method. No withdrawal shall be made by a check payable to cash or bearer or by any other method which does not identify the recipient of the funds. (4) Every withdrawal from a trust account for the purpose of paying fees to a lawyer or reimbursing a lawyer for costs and expenses shall be payable to the lawyer or the lawyer s law firm. (5) Each lawyer who has a law office in this Commonwealth and who holds trust funds shall deposit such funds, as appropriate, in one of two types of interestbearing accounts: either (i) a pooled account ( IOLTA account ) for all trust funds which in the judgment of the lawyer are nominal in amount, or are to be held for a short period of time, or (ii) for all other trust funds, an individual account with the interest payable as directed by the client or third person on whose behalf the trust

20 19 property is held. The foregoing deposit requirements apply to funds received by lawyers in connection with real estate transactions and loan closings, provided, however, that a trust account in a lending bank in the name of a lawyer representing the lending bank and used exclusively for depositing and disbursing funds in connection with that particular bank's loan transactions, shall not be required but is permitted to be established as an IOLTA account. All IOLTA accounts shall be established in compliance with the provisions of paragraph (g) of this rule. (6) Property held for no compensation as a custodian for a minor family member is not subject to the Operational Requirements for Trust Accounts set out in this paragraph (e) or to the Required Accounts and Records in paragraph (f) of this rule. As used in this subsection, "family member" refers to those individuals specified in section (e)(2) of rule 7.3. (f) Required Accounts and Records: Every lawyer who is engaged in the practice of law in this Commonwealth and who holds trust property in connection with a representation shall maintain complete records of the receipt, maintenance, and disposition of that trust property, including all records required by this subsection. Records shall be preserved for a period of six years after termination of the representation and after distribution of the property. Records may be maintained by computer subject to the requirements of subparagraph 1G of this paragraph (f) or they may be prepared manually. (1) Trust Account Records. The following books and records must be maintained for each trust account: A. Account Documentation. A record of the name and address of the bank or other depository; account number; account title; opening and closing dates; and the type of account, whether pooled, with net interest paid to the IOLTA Committee (IOLTA account), or account with interest paid to the client or third person on whose behalf the trust property is held (including master or umbrella accounts with individual subaccounts). B. Check Register. A check register recording in chronological order the date and amount of all deposits; the date, check or transaction number, amount, and payee of all disbursements, whether by check, electronic transfer, or other means; the date and amount of every other credit or debit of whatever nature; the identity of the client matter for which funds were deposited or disbursed; and the current balance in the account. C. Individual Client Records. A record for each client or third person for whom the lawyer received trust funds documenting each receipt and disbursement of the funds of the client or third person, the identity of the client matter for which funds were deposited or disbursed, and the balance held for the client or third person, including a subsidiary ledger or record for each client matter for which the lawyer receives trust funds documenting each receipt and disbursement of the funds of the client or third person with respect to such matter. A lawyer shall not disburse funds from the trust account that would create a negative balance with respect to any individual client.

21 20 D. Bank Fees and Charges. A ledger or other record for funds of the lawyer deposited in the trust account pursuant to paragraph (b)(2)(i) of this rule to accommodate reasonably expected bank charges. This ledger shall document each deposit and expenditure of the lawyer s funds in the account and the balance remaining. E. Reconciliation Reports. For each trust account, the lawyer shall prepare and retain a reconciliation report on a regular and periodic basis but in any event no less frequently than every sixty days. Each reconciliation report shall show the following balances and verify that they are identical: (i) The balance which appears in the check register as of the reporting date. (ii) The adjusted bank statement balance, determined by adding outstanding deposits and other credits to the bank statement balance and subtracting outstanding checks and other debits from the bank statement balance. (iii) For any account in which funds are held for more than one client matter, the total of all client matter balances, determined by listing each of the individual client matter records and the balance which appears in each record as of the reporting date, and calculating the total. For the purpose of the calculation required by this paragraph, bank fees and charges shall be considered an individual client record. No balance for an individual client may be negative at any time. F. Account Documentation. For each trust account, the lawyer shall retain contemporaneous records of transactions as necessary to document the transactions. The lawyer must retain: (i) bank statements. (ii) all transaction records returned by the bank, including canceled checks and records of electronic transactions. (iii) records of deposits separately listing each deposited item and the client or third person for whom the deposit is being made. G. Electronic Record Retention. A lawyer who maintains a trust account record by computer must maintain the check register, client ledgers, and reconciliation reports in a form that can be reproduced in printed hard copy. Electronic records must be regularly backed up by an appropriate storage device. (2) Business Accounts. Each lawyer who receives trust funds must maintain at least one bank account, other than the trust account, for funds received and disbursed other than in the lawyer s fiduciary capacity. (3) Trust Property Other than Funds. A lawyer who receives trust property other than funds must maintain a record showing the identity, location, and disposition of all such property.